Many global organisations take business loans, and therefore, the myth and fear associated with them get entirely disqualified. An organisation can take such a loan for serving numerous purposes.
A few of them include working capital management, expansion, investing in growth opportunities, etc. Other reasons include purchasing new equipment, getting ahead of the rivals, enhancing the credit score, generating more revenue, having cash flow flexibility, etc.
Firms may even take such a loan for hiring new employees, boosting organisational security, etc. According to research, corporate lending might amount to £430 billion this year. The result is based on the three per cent consistent rise in business loans since 2017.
The Six Important Reasons for Availing a Business Loan
● Contributes Towards Expansion
The most common and valuable purpose of taking a business loan is for expansion. As the organisation flourishes, it would require more workforce to manage everyday operations. Therefore, opening new offices across different location would prove much more helpful.
Expansion can even cover switching an existing office to a new location. The reason could include better market visibility, office environment, facilities, nearby services, vicinity to cheaper service providers, etc.
Also, expansion can occur only when the business is booming. The likelihood of the former without the latter is almost negligible. A company that decides to move to a new location would require higher rent, daily costs, and significant overhead.
Moreover, avoiding salaries of the owners to recover organisational might prove as a suitable solution. The profits of new businesses often remain inconsistent until it achieves a significant market reputation.
Another reason for expansion could include the unimaginable low cost of operation at a new location compared to the current expenses. But relocation can come with a significant loss of employees, hiring and training recruit costs, etc.
Unfortunately, most firms have a limited budget under the business plan for expanding operations. Therefore, under such circumstances borrowing money in the form of a business loan from banks, financial institutions, or lenders can serve the purpose.
Furthermore, the cash flow increases with ideas or suggestions from new employees. Additionally, hiring more people in the sales department would increase the profits tremendously.
Therefore, the business would keep expanding to manage the growing profits. The company can even create higher emergency funds, invest in growth opportunities, and execute continuous repayments.
● Sustains Working Capital
The two significant sources of funding for an organisation are investors and loans, besides personal investments. However, most experienced entrepreneurs avoid opting for the last choice as they incur a personal loss during bankruptcy.
A business loan can provide the required funding to an organisation to get up from the ground and make its presence count in the market. Smart business owners make sure that a portion of the money gets utilised for marketing and building brand awareness, especially for localisation.
However, the significant contribution of a business loan is towards sustaining working capital. Under challenging circumstances, such funds help to keep the cash flow consistent. Moreover, such a loan is a corporate entity. Therefore, the liability of a loan default falls entirely on the organisation.
Hence, the liability of the loan doesn’t occur to the company owners. Additionally, during liquidation, a portion or total amount of the loan gets covered. Moreover, an organisation may suffer many significant losses during its functioning term.
Some of these could include leaving a partner or an investor, uncertain market scenarios, sudden drift in online trends, etc. The circumstances could also include developing a problematic relationship with a bank, monetary distrust from a known person, etc.
Under such situations, the business needs to showcase an ongoing and productive image. However, it may still impact business finance to a great extent. A business loan can uplift the firm’s morale through marketing and HR activities that require funding.
● Purchase Assets
Businesses often require assets like equipment, a physical office, warehouse, etc. Organisations that plan on working at a co-working office would need money for rent and space usage. Firms also require finance for paying service provides to build their stock.
If the company indulges in self-production, then it would require manual labour and material costs. Unfortunately, most entrepreneurs have limited or almost negligible personal savings. A business loan serves as a single funding option, especially for owners without a credit score.
Even small business loans bad credit can provide the necessary finance for buying new equipment. It takes a significant load off the organisation goals. Moreover, most owners prefer taking a loan that comes with a fixed interest rate. Therefore, market fluctuations don’t affect repayments.
Besides this, business often comes across chances that can help to outweigh existing debts. For example, making a bulk inventory purchase at a seasonal discounted price. Similarly, it can find a suitable place at a much reasonable price than expected, often referred to as stealing.
Wise entrepreneurs avoid over-enthusiasm while making new asset purchases. They switch to the practice of generating reliable revenue forecasts and resist overestimating profits. They rely on results as compared to gut or instincts.
● Stock Inventory
As mentioned before, a new organisation requires money for serving different purposes. One of them includes stocking the inventory if its a product-based organisation. On the other hand, if the firm is a service provider, it would require different softwares and manual labour.
Besides this, restocking inventory is a more crucial aspect for organisations, especially during the peak season. Having cash-in-hand through a business loan would open doors to new service providers, vendors, sellers, etc.
Therefore, the firm can choose from a list of high-quality options without worrying about the funding. Most companies increase their inventory during the peak season for generating higher revenue in the shorter term.
Organisations even pay-off their business loan debts if the profits become substantial. Stocking new inventory also comes in handy when the firm is short on revenue, has no funding options, loses investors, etc.
Unfortunately, stocking inventory requires space for storage. Additionally, it would have a significant impact during a period as compared to others. Many times, organisations that generate forecasts with data scientists’ help benefit from higher profits due to the low expenses.
Furthermore, stocking helps to recover from debt faster than expected by assisting organisations to generate greater profits, especially during the peak season. Unfortunately, the demand for the products would depend on different market scenarios.
Therefore, entrepreneurs must keep relevant market changes that may have a direct impact on their inventory. For example, the pandemic might have caused many sellers to decrease product prices. Hence, they may not generate the expected profits or might only recover product costs.
● Enhance Cash Flow
A 2020 UK Bank Study revealed that poor cash management leads to the collapse of eighty per cent of the companies. Therefore, the importance of cash flow never diminishes in any organisation.
However, a business only generates cash through sales and investor funding unless it avails a business loan. Managing cash flow helps to retain stability in the firm and create an investment capacity.
Therefore, the company take efficiency measures with consistent cash flow and create a pro-active environment. Entrepreneurs that mismanage cash flow often require to make aggressive or reactive money making measures.
A loss or diminishing cash flow becomes an obstacle in the completion of organisational goals. It even delays progress while competitors, especially new firms, leap. Unfortunately, an unstable cash flow can diminish the options for lenders and available loans.
● Averts Security Threats
The last and crucial reason for taking a business loan is that it helps to avert security threats. These don’t account for online attacks but include potential financial losses. For example, a new firm may require customers and avoid invoice factoring into account.
Therefore, it becomes vulnerable to financial payments not covered by the customers. As a result, it is incapable of recovering from its personal repayments. Simultaneously, service providers leave the organisation if they don’t receive regular payments.
Additionally, banks or lenders avail assets for secured loans due to the missing repayments. Moreover, a business can lose its credit line if the bank finds that it is going to land in jeopardy by viewing the financial statements.
Likewise, late payments from customers can diminish cash flow and create all the dangers associated with non-payments. Additionally, these two circumstances diminish the market credibility of the organisation.
Low funding can lead to using the ongoing technology while the competitors leap ahead in the market and generate higher profits. A business loan can help to avoid these security circumstances.
On the other hand, it provides funding to the organisation for switching to invoice factoring. Therefore, the firm receives credit verification of each customer and, therefore, can avoid debtor insolvency.
Business loans also offer many other significant benefits such as repayment holiday, long tenure with sustainable repayments, maintaining organizational ownership, etc.